1) Which of the following statements are true?

A) A fall in bond prices causes interest rates to fall.

B) Bond prices and interest rates are not connected.

C) A fall in interest rates causes a fall in bond prices.

D) A rise in interest rates causes bond prices to fall.

2) Which of the following bonds is trading at a premium?

A) a two-year bond with a $50,000 face value whose yield to maturity is 5.2% and coupon rate is

5.2% APR paid monthly

B) a ten-year bond with a $4000 face value whose yield to maturity is 6.0% and coupon rate is

5.9% APR paid semiannually

C) a five-year bond with a $2000 face value whose yield to maturity is 7.0% and coupon rate

is 7.2% APR paid semiannually

D) a 15-year bond with a $10,000 face value whose yield to maturity is 8.0% and coupon rate is

7.8% APR paid semiannually

3) Mike bought a stock and he found that the stock has an expected return of 19.5% with a standard deviation of 7%. Suppose that returns are normally distributed, Mike believed that approximately 95 percent of the time the return on the stock will be

A) between 7% and 19.5%.

B) between 8% and 35.5%.

C) between -4.% and 38.5%.

D) between 5.5% and 33.5%.

4) Assume that you have $100,000 invested in a stock whose beta is .85, $200,000 invested in a stock whose beta is 1.05, and $300,000 invested in a stock whose beta is 1.25. What is the beta of your portfolio?

A) 0.97

B) 1.02

C) 1.12

D) 1.21

5) Beta is a statistical measure of

A) unsystematic risk.

B) total risk.

C) the standard deviation.

D) the relationship between an investment's returns and the market return.

6) Collectibles Corp. has a beta of 2.5 and a standard deviation of returns of 20%. The return on the market portfolio is 15% and the risk free rate is 4%. According to CAPM, what is the required rate of return on Collectible's stock?

A) 37.5%

B) 31.5%

C) 26.5%

D) 23.5%

7) Google Inc issued bonds on January 1, 2006. The bonds had a coupon rate of 6%, with interest paid monthly. The face value of the bonds is $1,000 and the bonds mature on January 1, 2016. What is the intrinsic value of a Google bond on January 1, 2011 to an investor with a required return of 7%?

A) $957.92

B) $978.57

C) $1,000.00

D) $1,104.28

8) Firm A issued $1,000 par 10-year bonds. The bonds sold for $907.20 and pay interest semi-annually. Investors require a rate of 8.5% on the bonds. What is the bonds' coupon rate?

A) 3.552%

B) 4.811%.

C) 6.525%.

D) 7.104%.

9) . Homer's Trucking Company bonds have a 11% coupon rate with semi-annual coupon payment. The bonds have a par value of $1,000 and will mature 2 years from now. Compute the value of Homer's Trucking Company bonds if investors' required rate of return is 9.5%. (Using the formula instead of using the financial function on your calculator)

A) $1,197.27

B) $1,133.05

C) $1,098.99

D) $1,026.75

10) Assume that Brady Corp. has an issue of 18-year $1,000 par value bonds that pay 7% interest, annually. Further assume that today's required rate of return on these bonds is 5%. How much would these bonds sell for today?

A) $1,233.79

B) $1,201.32

C) $1,134.88

D) $1,032.56

11) Peerless Securities has an issue of $1,000 par value bonds with 18 years remaining to maturity. The bonds pay 7.7% interest on a semi-annual basis. The current market price of the bonds is $1,175. What is the expected return (yield-to-maturity) of the bonds?

A) 3.05%

B) 3.87%

C) 6.24%

D) 6.09%

12) Lily Co. is expected to pay a dividend of $5.25 on its common stock next year. The company's dividends are expected to grow at a constant rate of 8.5% indefinitely. If the required rate of return on this stock is 15.5%, compute the current value per share of Lily Co. stock.

A) $88.38

B) $75.00

C) $56.23

D) $43.90

13) Tim is considering the purchase of a common stock that will not pay any dividend for next 3 years. The first dividend will be $2 in the end of year 4. He expects this stock to have a constant growth rate of 8 percent since then. If he requires a 12 percent rate of return, how much is he willing to pay for this stock?

A) 34.55

B) 35.59

C)37.42

D)39.28

14) Creamy Custard common stock is currently selling for $79.00. It just paid a dividend of $4.60 and dividends are expected to grow at a rate of 5% indefinitely. What is the required rate of return on Creamy Custard's stock?

A) 11.11%

B) 11.76%

C) 12.2%

D) 14.21%

15) The last dividend paid by Coppard Inc. was $1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price?

A)	$30.57
B)	$31.52
C)	$32.49
D)	$33.50

16) Based on the corporate valuation model, Bizzaro Co.'s value of operations is $300 million. The balance sheet shows $20 million of short-term investments that are unrelated to operations, $50 million of accounts payable, $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity. Bizzaro has 10 million shares of stock outstanding. What is the best estimate of the stock's price per share?

A)	$13.72
B)	$14.44
C)	$15.20
D)	$16.00

17) Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bond's nominal yield to call?

A)	5.01%
B)	5.27%
C)	5.54%
D)	5.81%

18) Your portfolio only has two stocks. You invest 500,000 on stock A and 300,000 on stock B. Following is the information about the market and stocks. What is the required rate of the return on this portfolio? (Hint: S&P 500 index is a well-diversified market portfolio)

Risk free rate	2%
S&P index return	8%
Standard Deivation of Stock A	10%
Standard Deivation of Stock B	15%
Standard Deviation of S&P index	9%
Correlation between Stock A's return and S&P 500 return	0.65
Correlation between Stock B's return and S&P 500 return	0.50

A)	5.01%
B)	6.57%
C)	7.54%
D)	8.81%

Using the following information for Question 19 and 20.

Stock A has the following returns for various states of the economy:

State of the Economy Probability Stock A's Return

Recession 10% -30%

Below Average 20% -2%

Average 40% 10%

Above Average 20% 18%

Boom 10% 40%

19)What is Stock A's expected return

A) 5.85%.

B) 7.2%.

C) 8.2%.

D) 9.6%

20) What is Stock A's standard deviation?

A) 13.85%.

B) 14.42%.

C) 15.84%.

D) 16.98%